Now suppose you were an idiot. And suppose you were a Senator . . . but I repeat myself.

By Megan McArdle

A reader wants to know what I think of this:

Legislation meant to crack down on oil speculators passed a key test vote in the Senate on Tuesday.

The test vote on
the legislation, which was backed by the Democratic leadership, was
94-0. The support of 60 senators was needed for debate on the bill to
proceed. It was unclear when a final vote on the legislation would
occur.

With gas prices edging over $4 a gallon, lawmakers are rushing to introduce legislation meant to lower prices at the pump.

Sen. Byron Dorgan of North Dakota, one of the Democrats sponsoring the
bill, said the quickest way to lower prices at the pump is to stop
speculators from driving up the price of a barrel of oil.

"First
things first. If you are running a race with hurdles, jump the first
hurdle first," Dorgan told reporters Monday. "The reason we have oil at
$130, $140, $145 a barrel -- like a roman candle going up, up, up -- is
because we have excessive, relentless speculation in these markets.

"Nothing in supply and demand in the last year justifies the price of oil."

Mark Cooper of the Consumer Federation of America argued that market
fundamentals do not explain a $40 to $60 per barrel "speculative
premium" that he said he believes exists on the price of oil.

Unfortunately what I think is unprintable.

Let me see if I can phrase it in a more ladylike way than the exclamations that spring immediately to mind.

The first thing I think is that my liberal friends should stop saying their party is more credible on economic issues. Because this is even stupider than McCain's doubling down on the gas tax holiday--and McCain's gas tax mania is plenty stupid. At least McCain's gas tax manipulations won't actually do something except give a small amount of additional money to oil companies and loathesome governments. This monstrous bill, on the other hand, might actually do some damage.

The second thing I think is that when I interviewed the CFA on bankruptcy reform some years ago, I thought they were well-meaning if a tad hysterical. I have revised that estimate substantially downward since reading that story. If they were a stock, they'd have moved from "hold" to "sell short".

Let's look at the basic economics here. I agree that there is a "speculative premium" in the market--the price changes obviously do not simply reflect change in demand conditions or other new information. They're too volatile.

That doesn't mean that this speculative premium is wrong. Speculation is not a synonym for "gambling"; it's a synonym for "guessing". The speculative premium reflects people guessing that the mismatch between supply and demand will be even greater in the future than it is now.

Sometimes speculators are wrong, of course--just ask my classmates who took out $100,000 worth of student loans for business school so that they could hold onto that valuable Webvan stock. But sometimes they're right--the Confederate speculators who made a fortune buying and holding staples in the Civil War guessed, correctly, that the South would be getting a little hungry by and by.

Of course, this makes people angry who want to consume cheaply now, which is why you hear so much talk about war profiteers. But in fact, the speculators were providing a very valuable service. Without them, the confederacy would have consumed those staples early in the war at an artificially low price, and been even hungrier later.

There's a good chance that this is what the speculative premium in the marketplace is doing now--forcing us to hoard a resource that is about to get even scarcer. There's also a good chance it's not, of course. But my guess isn't any better than theirs--and at that, my guess is a lot better than the idiots in Congress sponsoring this legislation, since they aren't even trying to make a reasonable estimate. They're simply pandering to constituents and consumer groups who think cheap gasoline is a civil right. Pandering is only what I expect, of course, but in this case, their proposed reforms are aimed at making the market work less well--making it less liquid, and blunting the valuable information that high prices are giving us.